Beware of the post Budget Sensex forecasts!
(Mar 2, 2015)
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In this issue:
» India scores poor on tax collection parameter
» Will the recent Budget curtail RBI's powers?
» Market roundup
» ...and more!
One of the most awaited financial events is past us now. And there is a lot of analysis on the hits and misses in the roadmap laid out by the Finance Minister Arun Jaitley. Going by the reviews, it seems to be a positive Budget. Whether or not it will fulfill its agenda is something time will tell as the key lies in the implementation. Cliched though it may sound, this is the aspect that determines the success of the Budget. Also, the aspect where most of the Governments falter, irrespective of how noble the intentions are.
We have already presented our views on the Budget in the previous edition of Wrap up. What we want to bring to your attention this time is one of the evils that invariably tags along with such announcements i.e. speculation in the stock market. It is noteworthy that Sensex has changed direction at least 12 times post the Budget Speech!
While even the experts believe that the Budget is somewhat short on details to be effectively analyzed, there are people who have already written its success story. Take any financial daily. The pages are littered with the headlines and articles predicting future levels for Sensex on the basis of Budget Speech, as high as 50k (up 70% from the current levels) in a period of 2 years!
If you go deeper, there will be no dearth of reasons cited for these gains. The one which we would like to mention here is the doubling of corporate earnings and hence their share in GDP from a low of 4% to high of 7% , even as GDP itself is expected to go from below 5% to over 8%. What it fails to take into account is that even as a real improvement is yet to be seen at the ground level and in the corporate earnings, the rise in Sensex over last one year already takes into account a lot of such expected upsides.
While positives are already getting reflected, we need to be mindful of the speed breakers that may come in the way of growth. Much of the turn around in the economy has been on account of benign global factors such as oil price decline. Even the softening of inflation is more because of external reasons, something which the Government can not take much credit for. The manufacturing climate in the country does not paint a very positive picture either. And last but not the least, much of the gains in the Sensex are a result of the huge FII inflows in the backdrop of relatively low rate of returns in the developed economy. A reversal in any of these trends could lead to an unfavourable twist in the growth story. And in case that happens, we will not be surprised to see doomsayers coming to the forefront. Except that they will be as unreliable as the cheer leaders are now.
Our suggestion to you is to drown these noises and not let them affect your investing decisions. Across the budgets and economic cycles, there have been stocks that have done well and others that have tanked, exposed to the same economic environment and expectations. What has made these stocks and the investors in them winners or losers are the company specific fundamentals. Hence, focus on the bottom up stock picking and stay disciplined in your investing decisions. And that alone should be enough to make equity investing a rewarding experience in the long run.
Do you get influenced by speculations in stock markets post events like Budget announcements? Let us know your comments or share your views in the Equitymaster Club.
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An important highlight of the Budget that we bet did not miss anyone's attention was a reduction in the corporate tax rates over next four years to a marginal rate of 25%, from 30% now. The gap between the two rates to some extent gives an idea of the quality of tax administration (efficiency in tax collection) in a country. The higher the gap, the poor is the tax administration.
Mr. Aswath Damodaran, a renowned name in the world of corporate finance and valuations has done an interesting exercise in an attempt to measure tax administration. He has compiled effective corporate tax rates (average rate of taxation) for different countries for 2013 and compared this to marginal tax rates (rate of tax that applies to the last unit of income). As per the data compiled by Mr. Damodaran, India's stands in the bottom 20 in terms of tax collection. As per Mr. Damodaran, the global average difference between marginal and effective tax rates is about 2.6%. India, with a gap of 7.82%, seems to be a laggard in terms of efficiency in the tax administration.
As far as India is concerned, different kinds of exemptions are responsible for the huge gap between the two. As mentioned in an article in Livemint, these exemptions have not only led to an uneven playing field for different companies, but have resulted in ambiguous tax code, making the country less business friendly. In this context, Finance Minister's decision to remove these exemptions as corporate tax rates are brought down will be a move in the correct direction leading to better business planning we believe.
Tax administration : India in the list of bottom 20
The tussle between growth and inflation is something we all are already aware of. As a pro growth Government came into power last year, there were fears if the Reserve Bank will be under pressure to give way to a rate cut. But nothing of that sort happened. Under the able leadership of Mr. Rajan, the central bank chose to stick to its disciplinarian role as far as inflation was concerned. However, with Budget 2015 laying way to a new monetary policy committee and separate Public Debt Management Agency (PDMA), RBI powers may be curtailed.
As an article in Firstpost highlights, the Government from now on will have an important say in deciding the inflation targets. While the veto power will rest with the RBI Governor, there might be certain strain as far as independence of central bank is concerned. This is specially keeping in mind that debt management - one of the RBI's core functions that manages liquidity in the banking system will be moved to a separate debt agency.
Further, while the Government has set the inflation targets for RBI (below 6%), it has pushed its own target of keeping fiscal deficit under 3% by a year to 2017-18. Given the fact that inflation level in India are much determined by supply side factors and Government's fiscal policies, the new framework may unfairly hold RBI solely responsible for inflation targeting.
The Indian stock markets witnessed a volatile session today. After opening on a firm note, the markets slipped into the red in the afternoon trading session, but recovered in the latter half. The BSE-Sensex closed the day higher by around 97 points, led by the stocks in the capital goods and banking sector. However, FMCG and realty stocks were facing selling pressure.
"I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies." - Peter Lynch
|| Today's investing mantra
Editor's Note: This Sunday, in the 5 Minute WrapUp we carried a link to a video - Get Up. Stand Up. Don't Give Up the Fight: How Your Chair is Killing You produced by our friends at Common Sense Living. The video generated quite a response, including questions about the credibility about research based on which the claim was made. Here's Anisa Virji, the Editor, with a follow up on the same... "I mentioned research that indicates that 'sitting for 6 hours or more a day is equivalent to smoking a pack of cigarettes a day.' This idea seems to have originated in an Australian study published in October 2012 in the British Journal of Sports and Medicine, which compared the negative impact of prolonged sitting with that of smoking.
Doctors, and other purveyors of health ideas everywhere, jumped on the comparison in this study to sensationalise the harms of sitting leading to headlines such as Anup Kanodia, a physician and researcher at the Center for Personalized Health Care at Ohio State University's Wexner Medical Center saying that "Sitting is the new smoking,"; Nilofer Merchant (referenced in the video) calling sitting the smoking of our generation and David Agus, MD, leading cancer doctor who treated Steve Jobs, saying that sitting for five or six hours a day, even if you spend an hour a day at the gym, is the equivalent of smoking an entire pack of cigarettes.
The idea is not to tamp down on the harms of smoking (which have been established beyond a doubt) but to bring awareness to the harms of prolonged sitting. As I note in the video, just the fact that we have to scrutinize the simple, ubiquitous activity of sitting - compare it with smoking, and measuring its risk of death is scary enough. If smoking is your vice, yes do definitely quit. But if sitting is your vice, this article hopes to get you off your behind as well."
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|This edition of The 5 Minute WrapUp is authored by Richa Agarwal.
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